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Would a negative deposit interest rate not lead to EU-wide bank runs?

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  • 14-05-2014 12:45pm
    #1
    hatrickpatrick
    Registered Users Posts: 17,797 ✭✭✭✭


    Being reported in several papers this morning that a negative deposit interest rate is something the ECB is willing to consider.
    If this means what I think it means, that instead of getting a certain % of extra cash annually, one would instead have that percentage deducted from their bank account, would this policy not be similar to the Cyprus proposal last year to take money from bank accounts, which everyone will remember was an unbelievably stupid proposal which caused utter chaos for several weeks?

    I mean if I was told tomorrow that the bank would start reducing my balance each year in line with a negative interest rate, I'd be down to the ATM and running for the hills in a split second.


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    #2
    ABC101
    Closed Accounts Posts: 1,118 ✭✭✭ABC101


    If I understand the concept correctly... it would not apply to retail customers .ie the man / woman on the street.

    Negative rates mean that when AIB or BOI or Banco Santander place money overnight with the ECB... that a negative rate would apply.

    In other words it would cost them money to place money with the ECB.

    Problems still remain with banks in Europe not trusting each other, coz a lot of the banks are weak financially, i.e. big debts, defaulting loans and poor income stream, high costs (employees etc) and pension issues.

    Therefore they prefer to deposit money with the ECB rather than spread their money around to other banks.

    By going negative rates, the ECB is trying to force the banks to stop depositing money with the ECB and instead get the money onto the "shop floor" of local economies etc.

    I don't think retail rates for domestic customers would go negative... perhaps edge closer to zero...

    Anyway holding a bank account is costly... there are so many charges for this that and the other, and with DIRT being so high... that when inflation goes to 2%, people will in effect be earning negative rates anyway... if not now.


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    #3
    Geuze
    Registered Users Posts: 13,066 ✭✭✭✭Geuze


    Yes, the ECB controls the short-term wholesale money market rates, not the retail deposit rates.

    Though presumably the idea is to cause a further fall in deposit rates.

    2.3% is still possible to get on deposits in Ireland, this is way too high as the ECB base rate is 0.25%.


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    #4
    Justin1982
    Closed Accounts Posts: 328 ✭✭Justin1982


    Negative interest rates and printing cash always seem to me to be similar to national Governments mentality to pump huge money with enthusiasm into military solutions in times of trouble rather than pumping large amounts of money and effort into diplomacy and root causes in times of peace.


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    #5
    ABC101
    Closed Accounts Posts: 1,118 ✭✭✭ABC101


    So if the ECB does turn on the printing presses.... just where is all this loolah going to go?

    The stock market perhaps?


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    #6
    Hasschu
    Registered Users Posts: 411 ✭✭Hasschu


    Central banks and large investment and retail banks have heavily automated their transactions. This means they do not have the flexibility to handle paper money or gold. A warehouse full of Euro bills and gold is not an option for the vast majority of large financial institutions. Therefore they pay the ECB 1/4% + or - to "store" (digitally) their surplus cash. This fits neatly into their internal and external audit and speed of transaction needs, no fuss, no muss, carry on as usual.

    By the way there are 50 year, 2% bonds selling at a premium to yield around 1.9%.

    Even healthy economies have adopted zero interest rate policies (ZIRP) and are experiencing difficulty at staving off deflation. We are living in interesting times.


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    #7
    sin_city
    Registered Users Posts: 899 ✭✭✭sin_city


    Hasschu wrote: »
    Even healthy economies have adopted zero interest rate policies (ZIRP) and are experiencing difficulty at staving off deflation. We are living in interesting times.

    You've bought into the myth that deflation is a bad thing.

    Once someone can tell me why 2% inflation is good but 5% and is bad I'll accept the argument...

    Can you base it on something other than spun misinformation about Japan?


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    #8
    Justin1982
    Closed Accounts Posts: 328 ✭✭Justin1982


    sin_city wrote: »
    You've bought into the myth that deflation is a bad thing.

    Once someone can tell me why 2% inflation is good but 5% and is bad I'll accept the argument...

    Can you base it on something other than spun misinformation about Japan?

    National governments want to inflate their national debts away under a carpet. If they deflate their economies then the size of debt to gdp can end up getting out of control.

    Fast inflation is first sign of an unhealthy economy. Commodity bubbles of different types can grow faster than the economists or governments can track them or react to them leading the **** hitting fans. If an economy could cope and adjust quickly to high inflation and not end up with massive imbalances/bubbles then in theory they wouldn't care whether inflation was high or low.


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    #9
    Rightwing
    Closed Accounts Posts: 8,101 ✭✭✭Rightwing


    Should be a debate on this inflation 2% target.

    It is a headless strategy from CBs that will end in complete failure.


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    #10
    Geuze
    Registered Users Posts: 13,066 ✭✭✭✭Geuze


    Rightwing wrote: »
    Should be a debate on this inflation 2% target.

    It is a headless strategy from CBs that will end in complete failure.

    There is a large debate within economics about it.

    Some suggest price-level targeting.

    Some suggest nGDP targeting.

    Some suggest a temporary 4% inflation target.


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    #11
    Rightwing
    Closed Accounts Posts: 8,101 ✭✭✭Rightwing


    Geuze wrote: »
    There is a large debate within economics about it.

    Some suggest price-level targeting.

    Some suggest nGDP targeting.

    Some suggest a temporary 4% inflation target.

    But it needs to be brought into the public domain. A few academics are making absolute critical decisions, and I'm not sure they are up to it.


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    #12
    sin_city
    Registered Users Posts: 899 ✭✭✭sin_city


    Geuze wrote: »
    There is a large debate within economics about it.

    Some suggest price-level targeting.

    Some suggest nGDP targeting.

    Some suggest a temporary 4% inflation target.

    Some suggest letting market forces work....this whole monopoly CB debt money ponzi scheme is fast approaching it's end.


    pulling out a pie in the sky number like 2% or 4% is pure madness but the propaganda seems to be working for the moment.


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    #13
    recedite
    Closed Accounts Posts: 13,993 ✭✭✭✭recedite


    As long as banks charge interest, there will always be some level of inflation. More money always gets printed under the fiat money system than gets paid back. Otherwise where would the money for the interest payments come from?
    So this differential represents the amount that banks "cream off" from the economic system, like a tax.

    All inflation is bad, but if inflation is allowed to go much above 2% for long, things get very bad. 2% is tolerable. Therefore 2% is the target. Banks can keep fleecing the economy at that rate without killing it.

    That thing about inflation being good for alleviating national debt is a red herring. If debt laden nations weren't paying high interest rates to service their debts, they would have no bother paying off the capital sum.


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